STAC Tackles Volatility, Social Media and Blockchain

The Security Traders Association of Chicago holds its Midwinter Meeting this week at the Hilton, bringing in industry participants from a variety of warmer climes than Chicago. Day one covered such seemingly disparate issues as volatility and volatility products, social media for traders, and Bitcoin/Blockchain technology.

Some highlights from the panel called “Volatility: Shaken Up with New Products and Less Risk”, moderated by the CBOE’s Matt Moran, included:

If you look at skew worldwide, it is highest in the U.S. One reason for this, according to Joe Aiken from Malachite Capital Management, is that most S&P option activity is in hedging. In the U.S., buying puts on the S&P 500 is the most efficient hedge, but in Asia, for example, options activity comes mostly from retail customers, who sell put options to generate yield. The hedging activity in the US makes the skew steeper.

With the success of the VIX and VVIX, more and more exchanges are launching volatility indexes, with the main driver being futures on these indexes, said Andrew Curto of Sumo Capital. The VIX has been the most successful, because of its design and the market it covers. Asian and European markets have need for a volatility index, but unfortunately most international indexes are not taking off because of liquidity concerns, according to Dominic Salvino of Group 1.

Despite extended hours in volatility products, the best thing to trade on a Sunday night is the S&P500 futures.

The VIX structure is more like a commodity – the Eurodollar futures, for example, or interest rates – and less like the equity structure, Curto said.

VIX weekly futures rose 42.1% in recent weeks, partly due to the Fed’s letting interest rates rise a little. The perception that the Fed will let the rates rise somewhat adds some short term volatility to the market.

Oil dropping so far in price would have been a boon to the markets in the past, but currently is bad for shale companies and is putting fear into the markets, causing them to drop and to become more volatile.

With so many different opinions on what the market is going to do in coming weeks or months, the level of uncertainty will likely push the VIX higher, according to Curto.

The market is in a weak backwardation right now, but will likely return to the more normal contango soon, Salvino said.

A panel on the rise of social media in trading, moderated by 3Points’ Lorna Kiewert, agreed that Twitter is the social media platform most used by those in the financial industry. However, about 80% of users only look at Twitter and don’t post anything. Quants are looking at Twitter for alpha generation; those in sales are looking for ideas. Many companies are taking their M&A announcements straight to Twitter rather than putting out a press release or going through Bloomberg. Filtering the good information from the bad is tricky but doable. The panelists felt that Snapchat was still for the youngsters, but is not really being used by traders. Compliance officers hate Twitter, however, and there is no upside to being on Twitter for the sell side, the panelists said.

Blockchain and Bitcoin have gone from being seen as dubious, possibly criminal endeavors to becoming “buzzwords”, to being taken seriously by the financial industry. At the panel on “Unique Applications of Blockchain Technology” Sean Ristau, Raptor Trading Systems, said blockchain has the potential to greatly simplify and speed up financial settlements, bringing antiquated back office processes into the modern technology age. A blockchain transaction can take place in 10 minutes (that time delay is built in to prevent erroneous transactions) but it could bring the settlement process down to 2 days from 3 days, or even faster eventually.

There are public and private blockchains. Bitcoin is public, but banks could potentially use a private blockchain mechanism that would be members-only. Instead of using the Fed’s wire system, a blockchain system could be used that would allow people to capture the history of all their financial transactions, Ristau said.

Eric Gravengaard, CEO of the Red Leaf Group, said that when he first heard of Bitcoin and Blockchain he thought it was “the dumbest thing I had ever heard.” He had no interest in buying a cup of coffee with Bitcoin. But then he realized that we already have electronic money – for example, the credit/debit card in your wallet. So it’s not that far out an idea. The most important use he sees for Bitcoin, though, is to enable small companies – even those as small as five people – to do global business transactions with other small businesses. Cross border payments with countries in Africa and Asia, for example, are extremely difficult, and a payment system for those transactions is badly needed, Gravengaard said.

There are concerns about the often rapidly changing value of Bitcoin, and there are some security concerns as well. But those concerns don’t necessarily apply to Blockchain. A “block” holds data and is agnostic about what data it is holding, said Ron Quaranta, chairman of the Wall Street Blockchain Alliance. He said the technology could be used to track customer data for broker dealers, for example, and could mean “a quantum shift” in the speed with which financial transactions can happen.